In a November 16, 2018 Statement on Digital Asset Securities Issuance and Trading, the Securities and Exchange Commission (SEC) announced its current position on regulation of blockchain and other distributed ledger technologies. In its Statement, the SEC emphasized that “market participants must still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.”
The Statement relied on five recent enforcement actions to underscore the continued importance of compliance with federal securities laws. The SEC lumped the issues raised by recent enforcement actions into the following three categories: “(1) initial offers and sales of digital asset securities (including those issued in initial coin offerings (“ICOs”)); (2) investment vehicles investing in digital asset securities and those who advise others about investing in these securities; and (3) secondary market trading of digital asset securities.”
In discussing offers and sales of digital asset securities, the SEC highlighted two settlement orders it had issued earlier that day against entities AirFox and Paragon in connection with their unregistered token offerings, requiring the companies to pay monetary penalties and register their tokens as securities under Section 12(g) of the Securities Exchange Act of 1935 (Exchange Act), in addition to filing periodic reports with the SEC. With regard to investment vehicles investing in digital asset securities, the SEC advised all involved to be “mindful of registration, regulatory and fiduciary obligations under the Investment Company Act and the Advisers Act.” On the issue of exchange registration, the SEC recommended that entities using blockchain or distributed ledger technology for trading digital assets “carefully review their activities on an ongoing basis to determine whether the digital assets they are trading are securities and whether their activities or services cause them to satisfy the definition of an exchange.” Finally, addressing broker-dealer registration, the SEC cautioned entities which facilitate the issuance of digital asset securities in ICOs and secondary trading that they may qualify as “brokers” or “dealers” which are required to register with the SEC and maintain membership in a self-regulatory organization. Specifically, the SEC emphasized that pursuant to Section 15(a) of the Exchange Act, “absent an exception or exemption, it is unlawful for any broker or dealer to induce or attempt to induce the purchase or sale, of any security unless such broker or dealer is registered in accordance with Section 15(b) of the Exchange Act.”
In conclusion, the Statement stressed that companies using new blockchain technologies should consult with legal counsel to ensure that their practices comply with federal securities laws.